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“Masterclass: Leveraging Islamic Finance to Enhance Investor Education & Investor Protection

Patrick Mahdi O’Neill 8th October 2020 Masterclass: Leveraging Islamic Finance to Enhance Investor Education & Investor Protection Agenda

 Introduction – Regulators Perspective, Investor Education & Investor Protection  Islamic Finance Background o Industry Overview o What is Islamic Finance – Key Principles, Rules & Prohibitions  Principals and Ethics of Islamic Finance o Islamic Corporate Governance o AAOIFI Code of Ethics  Education o Institutional Level § The Need for Benchmark Professional Qualifications o Investor Level o New Paradigm of Learning in Covid 19 World Objectives of Securities Regulation

Protecting Investors

Protecting InvestorsEnsuring that Markets are Reducing Fair, Efficient Systemic Risk and Transparent Systemic Risk & Financial Crises

18th Century Crisis of 1763, started in Amsterdam, begun by the collapse of Leendert Pieter de Neufville, spread to and Scandinavia –1773 in and Amsterdam, begun by the collapse of the bankers Neal, James, Fordyce and Down. , New York Panic of 1796–1797, Britain and

19th Century , a U.S. with failures; culmination of U.S.'s first boom-to-bust economic cycle , a pervasive British recession in which many failed, nearly including the , a U.S. recession with bank failures, followed by a 5-year depression , , a U.S. recession with bank failures , , a U.S. recession with bank failures, followed by a 4-year depression , United States and Europe Panic of 1890, mainly affecting the United Kingdom and Argentina , a U.S. recession with bank failures Australian banking crisis of 1893 Systemic Risk & Financial Crises

20th Century , a U.S. economic recession with bank failures Shōwa , a 1927 Japanese financial panic that resulted in mass bank failures across the Empire of Japan. , the worst systemic banking crisis of the 20th century Secondary banking crisis of 1973–1975 in the UK Japanese asset price bubble (1986–2003) Savings and crisis of the 1980s and 1990s in the U.S. Finnish banking crisis of 1990s Swedish banking crisis (1990s) Venezuelan banking crisis of 1994 1997 Asian financial crisis 1998 collapse of Long-Term Capital Management 1998 Russian financial crisis Argentine economic crisis (1999–2002) 1998–99 Ecuador banking crisis Systemic Risk & Financial Crises

21st Century •2002 Uruguay banking crisis •Late-2000s financial crisis, including: • in the U.S. starting in 2007 •2008 United Kingdom bank rescue package •2009 United Kingdom bank rescue package •2008–2009 Belgian financial crisis •2008–2012 Icelandic financial crisis •2008–2009 Russian financial crisis •2008–2009 Ukrainian financial crisis •2008–2012 Spanish financial crisis •2008–2011 Irish banking crisis •Venezuelan banking crisis of 2009–10 Problems Facing Regulators

Financial Terrorism Fraud Crime Laundering Financing

Cyber Crime Market Insider Abuse Dealing Investor Education & Investor Protection

Investor Investor Education Protection Investor Education – Micro Level

A Reminder: Drive Markets

Price Supply (Sellers)

P1 Equilibrium Price = Market Price = Buying Price = Selling Price

Demand (Buyers)

Quantity Q1 Investor Education – Macro Level When making an investment, what are the key things that Investors should look at?

Risk

P S P S Purchase Price Income Selling Price D D T0 TE Q Q • Economy • / • Interest Rates • • FX Rate Anything Else? • Government/Fiscal Policy • Attitude to Risk • Future Expectations • Capacity for Loss • The Unexpected! • Time Horizon • Liquidity • Knowledge/Expertise • Your Time • Capital Constraint • Tax Position Islamic Finance Industry Size

Total value of USD 1.88 trillion as of 2015 YTD

Region Banking Assets Sukuk Islamic Funds’ Takaful Outstanding Assets Contributions Asia 209.3 174.7 23.2 5.2

GCC 598.8 103.7 31.2 10.4

MENA (exc. 607.5 9.4 0.3 7.1 GCC) Sub-Saharan 24.0 0.7 1.4 0.5 Africa Others 56.9 2.1 15.2 -

Total 1496.5 290.6 71.3 23.2 Shariah & Fiqh

Shariah or Islamic law • Literal: The Path to Water • Islamic Way of Life – Set of Norms, Values & Laws • Is the Essence of Islamic Thought • Forms the Core of Islam

Fiqh or Islamic Jurisprudence Is the science of understanding the legal rights and obligations derived from its primary and secondary sources of Sharia i.e. Islamic Law. What is Islamic Finance What This Means?

Every Islamic Finance Loan Transaction

Asset

Rental of an Asset Qard Hassan

Service Why for Muslims

Purpose of Life: To Worship and Obey Allah •“And I created not the jinn and mankind except that they should worship Me (Alone).”―Quran 51:56

This Life is a Test •“Allah has created death and life to test which one of you is best in conduct.” ―Quran 67:2 Why for Humanity Key Sharia Principles

Allah (God) is the Owner of All Wealth

“To Him belongs what is in the heavens and on earth, and all between them, and all beneath the soil.” Surah 20 Ta Ha v 5

 Material Pursuits v Spiritual Needs  Individual's Needs v Society's Nee  ds

“Those who, when they spend, are not extravagant and not niggardly, but hold a just balance between those (extremes)” Surah 25 Al-Furqan (The Differentiator) v 67 Major Prohibitions – No Riba

 Interest or ‘Riba’ is Strictly Prohibited  No interest based !  Return on Capital - Effort & Risk

“ - But Allah has permitted trade and has forbidden interest. – “Surah 2 Al- Baqara (The Cow) Part of Verse 275

“O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers. “Surah 2 Al-Baqara (The Cow) Verse 278

“And if you do not, then be informed of a war [against you] from Allah and His Messenger. Surah 2 Al-Baqara (The Cow) Part of Verse 279 Major Prohibitions – No Gharar

Avoidance of Uncertainty or ‘Gharar’ • The trade or transaction should be free from contractual uncertainty • No ambiguity in terms of the key terms and subject matter of the underlying deal

Avoidance of Gambling • ‘Maysir’ is the acquisition of wealth by chance instead of by effort. • ‘Qimar’ refers to a game of chance. Investment – Industry Screen

Conventional Alcohol Pork-related Gambling Banking and products and non- Insurance compliant food

Tobacco Adult Weapons, Arms and Entertainment Defence Manufacturing Investment – Financial Screen

Conventional Debt < 30% Market capitalisation

Total Interest+Income from non−compliant activities) < 5% Income

Interest Bearing Deposits < 30% Market capitalisation Q: Is SRI = SCI?

Socially Responsible Sustainable Impact Investing Investing Investing (SRI) SRI Mission- based Financial Investing Aspects Religious Ethics Ethics

Values

Societal

Concerns Shariah Compliant Investing Investment Principles Investment A: Similar but Different

SRI Islamic Tobacco Cos Interest based Alcohol-producing Cos FIs Weapons Cos Pork Cos High Leverage Zakat – The Obligatory Charity

Literal: Increase (as in growth). Connotes Blessing, Purification, Commendation

Shariah: Zakat is the 3rd Pillar of Islam. It is an obligatory act of worship which applies to every Muslim possessing the designated minimal amount of wealth (called the nisab) for the full cycle of a lunar year (hawl), whom must pay a specified portion of that wealth (of which the percentage varies according to the type of wealth) to entitled beneficiaries specified by Allah.

% = 2.5% (on most types of wealth)

Sadaqa = Extra Charity Ethical Guidelines

 Do not lie to sell your products (principles of honesty and sincerity).  Honour your pledges and trustee obligations.  Do not deceive or defraud others.  Do not offer or solicit bribes.  Do not boast about your products.  Do not sell products that have a negative influence on the society (principle of stewardship).  Uphold justice in all your dealings and transactions with both friends and enemies (Quran 4:29, 4:135, 2:279).  Do not value your trade higher than your Lord (SWT) or allow it to distract you from the call to prayer (Quran 9:24). AAOIFI Code of Ethics a) Shari’ah Foundations of Accountants’ Ethics • Integrity • The principle of vicegerency of humanity on • Sincerity • Piety • Righteousness and making one’s work perfect • Allah-fearing conduct in everything • Man’s accountability before Allah b) Principles and Rules of Ethics for Accountants • Trustworthiness • Legitimacy • Objectivity • Professional competence and diligence • Faith-driven conduct • Professional conduct and technical standards CG in Harmony with Islamic Values

Good Corporate Governance effect on a companies activities and operations:

 Are not harmful to mankind and/or the environment

 Deal fairly and properly with customers

 Compete properly with its rivals: hoarding and monopoly are out, and any manipulation to corner the market is rejected

 Ensure staff are treated fairly – and in turn, staff respect the corporation and act professionally in their dealings with the corporation and its customers

 Are transparent. The customer’s ignorance of the market cannot be deliberately exploited or abused Enhance Investor Education – Institutional Level

Chartered Institute For Securities & Investments •Fundamentals of Islamic Banking & Finance •Islamic Finance Qualification (IFQ)

Chartered Institute of Management Accountants •Islamic Commercial Law •Islamic Banking & Takaful •Islamic Capital Markets & Instruments •Accounting for Islamic Financial Institutions

Chartered Insurance Institute •Principles of Takaful

Accounting and Auditing Organization for Islamic Financial Institutions Certified Islamic Professional Accountant (CIPA) Certified Shariah Adviser & Auditor (CSAA) Enhance Investor Education – Retail Level

▪ Islamic Finance Basics ▪ Islamic Banking ▪ Financial Planning Fundamentals

▪ Financial Mathematics using TVM Calculator & Excel ▪ Takaful Solutions – Managing Risk ▪ Wealth Management ▪ Islamic Property Investment ▪ Zakat and Islamic Wills Post Covid-19 Learning World Conclusion

Investor Protection Ethics

Leverage Debt Risk CISI Qualifications Offered at ADGMA Contact Us

THANK YOU! www.adgmacademy.com [email protected]